ECB’s Rehn: Reduction of Monetary Support Needs to Avoid Missteps of the Past

30 August 2021

By David Barwick – FRANKFURT (Econostream) – The weak inflation outlook justifies ongoing accommodative monetary policy, and any reduction of accommodation needs to avoid a repetition of past missteps, European Central Bank Governing Council member Olli Rehn said on Monday.

In an interview with Politico, Rehn, who heads the Bank of Finland, said that the ECB ‘should avoid the mistakes that were done in 2011 with early rate raises’ and be mindful that ‘the role of monetary policy is to ensure that we will not face a sudden setback in economic recovery.’

But inflation prospects suggest a need for continued monetary stimulus, he indicated. ‘The medium-term inflation outlook is probably the same as in the June forecast, according to my reading’, he said. ‘This means that inflation remains well below our new symmetric 2% target, which justifies the continuation of the accommodative monetary policy stance.’

Wage growth was ‘critical’ for core inflation, he said.

According to Politico, Rehn deemed it too early to confirm an ending date for the ECB’s pandemic emergency purchase programme (PEPP).

‘There is still plenty of uncertainty in the global economy and in the euro area, mainly because of the spread of the Delta variant and because of the slow pace of vaccination in some parts of the world’, he said. ‘So we are not out of the troubled waters yet.’

When the time comes to retire the PEPP, it should be done smoothly, he said. ‘It is always essential to have a smooth transition from forceful economic policy measures and that goes for the PEPP as well’, he said. ‘I'm certain that we will in due course, once the time is ripe, find a viable and workable solution to this challenge as well.’

Should the US Federal Reserve’s tapering lead to tighter European financing conditions, ‘the Governing Council stands ready to adjust and use all of its instruments, as appropriate, to ensure that inflation stabilizes at its 2% target over the medium term’, he said.